The importance of careful tax planning

After working hard to build your wealth, it is vital that you protect it as much as possible for the benefit of your family and future generations. Careful tax planning is one of the most effective ways of doing this and can help you pass on more of your wealth to your loved ones, rather than to HMRC.

One of the biggest tax liabilities comes from Inheritance Tax (IHT) which is applied to a person’s estate upon their death. More than £5 billion was paid in IHT last year alone in England and Wales, but with advance planning, that figure could be vastly reduced – however, predictions are that it will continue to rise as people continue to fail to make proper provision for their estate after their death.

Upon your death, you receive a personal allowance – the ‘nil rate band’ – to offset against the value of your estate from an IHT perspective. This will be set at £325,000 until at least April 5, 2021, and any value over the nil rate band is charged at 40 per cent.

Where property is passed to direct descendants, there is an additional residential inheritance tax nil rate band allowance, which currently offers an extra £125,000 allowance, rising to £175,000 by 2020/1. From then on, the allowance will be adjusted in line with the Consumer Prices Index unless the Treasury decides otherwise.

However, if your estate is valued at over £2.2 million, there is no allowance available – from £2 million it becomes tapered. This is calculated based upon the whole value of your estate, including personal and business assets and property – given the rising price of property, increasing numbers of estates are crossing this threshold, meaning their IHT liabilities rise significantly.

To help remain tax efficient, there are a number of ways of using your entitlements to put your money to best use:

• Annual allowance – you can give away £3,000 in any tax year, and it is possible to also use the previous year’s allowance if you have not used that. From April 6 each year, you can give away £3,000 free of IHT. Any amount exceeding that is classed as a potentially exempt transfer (PET) which means you must outlive the gift by seven years for it to fall outside of your estate – within that time frame, the amount is still treated as part of your estate for IHT purposes
• Gifts on marriage – you can gift £1,000 per person tax free for weddings or civil ceremonies. That rises to £2,500 if is a gift to your grandchild on their wedding, or £5,000 if it is your child
• Small gifts – small gifts of £250 can be made to any one individual during a tax year, but that amount cannot be exceeded to each person to remain free of IHT
• Gifts out of income – it is possible to make a further gift, providing it comes from your normal expenditure out of your taxed income. Providing you can maintain your usual standard of living, the excess income you gift will be treated as being outside of your estate for IHT purposes. You should establish a regular pattern of giving, such as paying school fees, and ensure these gifts are properly documented
• Establish a trust – there are a number of types of trust in which you can leave assets and cash, and in some cases you can qualify for IHT exemption. It is important you take professional guidance on how best to do this and which type of trust would be best for your circumstances
• Make gifts to charity – charitable donations are exempt from IHT, and if at least 10 per cent of a person’s net estate is left to charity, any IHT due on the remainder will be paid at a rate of 36 per cent instead of 40 per cent
• Take advantage of reliefs – two of the most important are Business Property Relief (BPR) and Agricultural Property Relief (APR) which may be claimed against IHT to reduce or even remove any IHT that would otherwise be due.

BPR is available providing the property has been owned for at least 2 years prior to the transfer, and relief could be available of 50 or even 100 per cent.

APR is available on the transfer of agricultural property, which includes buildings, land and farmhouses. Depending on the circumstances, relief of 50 or 100 per cent could be claimed.

Careful estate planning is essential to most effectively take advantage of the reliefs and exemptions available, and we would always advise doing this as far in advance as possible.

Paul Nickalls a partner at Newcastle law firm Sintons in the Personal and Family department and heads up the Wills and Probate Team. To speak to him please call 0191 226 3640, or email him at paul.nickalls@sintons.co.uk.